Educational Articles

From the Survey: Pengrowth Energy

Brendan Goldstein
| April 20, 2013

In 1988, Pengrowth Energy (PGH) was established to provide clients with investments in the oil and gas industry. The Canadian trust raised $12.5 million on the Toronto Stock Exchange through its initial public offering in the same year, and since 1994, has issued units regularly to expedite growth. The oil and gas corporation now sits on 512 million barrels of oil equivalent (BOE) that extends into parts of British Columbia, Alberta, and Saskatchewan. This represents a 55% increase over last year’s reserve numbers thanks to large acquisitions and improved drilling activity. At last quarter’s production rate, the company would be able to maintain operations for the next fifteen years.

Pengrowth has still not recovered from our most recent global recession. Collapsing commodity prices and operational difficulties have caused shares of Pengrowth to plummet over the past twenty-four months. Indeed, the company would have recorded a loss in 2012 if deals that secured extra land acreage had fallen through. The acquisition of NAL Energy Corp. that closed in May was also responsible for a 23% year over year increase in average daily volume levels. However, annual share net was still down 88%.

Management is responding with a revamped strategy that shifts focus away from traditional natural gas and oil plays in favor of the thermal bitumen business. Since becoming a true independent exploration and production company, Pengrowth has maintained both conventional and unconventional operations. That said, developing unconventional oil sands should offer a more stable business model further down the road. Lower declines and higher efficiencies would create an operational environment consisting of long reserve life, speedy production, and lower general expenses. This is in stark contrast of the issues that the majority of the Canadian energy industry players face. Generally, drilling in lucrative northern territories coincides with extensive geological challenges that require expensive technology and less reliable equipment.

Additionally, almost all Canadian crude oil exports are destined for American refineries. Success in North Dakota’s Bakken shale and throughout the midwestern, oil-rich region has drastically reduced the demand for imported energy stateside, causing prices to drop significantly. However, management expects to cut out some direct competition by advancing the company’s thermal bitumen position.

The Lindbergh project is at the forefront of the company’s transition. The three step process has demonstrated promise after reports of the two well pairs that have been in operation for less than a year produced at faster rates than Pengrowth previously anticipated. Phase I, which is expected to produce 12,500 bbpd, has been accelerated and full capacity is now expected to be reached by the middle of 2015. If all continues to go well, the project could move the company away from its financial stress.

Phase II and Phase III are expected to ramp up production periodically during the next five years. What’s more encouraging, however, is management’s discussion surrounding capital expenses. With the possible exception of giants like Exxon Mobil (XOM - Free Exxon Stock Report) and Chevron (CVX - Free Chevron Stock Report), exploration and production companies need to consistently reinvest an extremely high percentage of operating profits back into the business. It’s a vicious cycle, but since demand for natural resources will likely never diminish, executives are most concerned with operational efficiency. Similarly, investors are sometimes sympathetic to poor earnings when commodity prices are low. Pengrowth’s past misfortune has left behind a large debt pile. Therefore, it is important that funding the Lindbergh development does not add further stress to the balance sheet. The company’s 2013 plan sets aside $300 million for transitional expenses and $470 million to target light oil and liquids-rich natural gas in Swan Hills and the Greater Olds/Garrington area. Management intends to fund its capital program entirely through cash flow and asset sales for the next two years. However, an attempt to divest about $700 million of properties is dependent on the market for Canadian conventional holdings.

The United States quest for energy independence and low natural gas prices are strong factors for Pengrowth moving forward. Additionally, a number of risks and a shortage of funds could slow the thermal bitumen investment. Interested investors should also consider that Wall Street has not rewarded shareholders for much of the company’s good news. However, we think that sentiment could change if the Lindbergh project is funded appropriately and continues to post positive results.

For those interested in learning more about Pengrowth’s prospects, along with the particular investment merits of the stock, subscribers are encouraged to review our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.